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When you start a pension you pay less tax. By now you will have realised how important it is to set up a pension so you do not struggle in retirement. BUT what if you could pay less tax to the government too? Surely that’s a no brainer.

Each time you receive your wage packet you pay income tax. There are two rates of income tax.

Standard Rate

The standard rate of income tax is 20%. This means you pay 20% of the money you earn from working to the government in income tax.

The government want those who earn more money to pay more tax. This makes the system fairer. to make this happen there is a standard rate cut off point.

This means that you pay 20% in tax on the first €40,000 you earn per year. If you earn less than €40,000 a year you will only pay the standard rate of tax.

Higher Tax Rate

The higher tax rate is 40%. So anything you earn over €40,000 a year is taxed at 40%. So lets say you earn €50,000 a year.

This means that for every €100 you earn over €40,000 you give €40 to the tax man.

It goes without saying that you don’t want to work hard only to end up giving the tax man 40% of it. What if there was a way to legally not pay this tax?

To encourage you to save into a pension the government have said that anything you put into your pension will not be taxed.

Your employer takes the income tax you need to pay from your wages before they pay you. They then send the amount of tax you need to pay to the Revenue on your behalf.

When you put money into your pension, the amount you put in is taken from your wage before your tax is calculated.

For example if you were earning €1,000 a week and you decided to put €100 a week into your pension, you would only pay income tax on €900.

This is because €100 would be put into your pension pot before you are taxed.

If you are on the higher tax rate you give the government €40 out of each €100 you earn over €40.000 every year.

So every time you put €100 into your pension you save €40 that you would have had to give to the government.

OR

Every time you put €100 into your pension it only costs you €60.

If you earn over €40,000 a year then start a pension and pay less tax today. Keep more of your hard earned money.

There are limits to the amount of money you can put into your pension without paying tax. Get a more detailed explanation on Pension Tax Relief here.

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